KEY POINTS:
Halfway through 2008 and the average KiwiSaver account with a balanced portfolio mandate will be down by an estimated 5.4 per cent before fees in the six-month period. That's assuming that the fund managers have an asset allocation as per the traditional 40 per cent bonds and 60
per cent shares and property and have done as well as the market in each sector.
This is disappointing but a small improvement on the first quarter result of minus 6.4 per cent.
KiwiSaver accounts with a growth bias will have done slightly worse, recording a decline of 5.7 per cent, again before fees and, similarly, a recovery on the first-quarter figures.
These are estimated averages. Some KiwiSaver providers will have done better than this if they invested their funds with clever stock pickers or got their asset allocations right.
The latter strategy meant overweighting the few peripheral asset classes which did well in the half year - commodities (25.3 per cent) and Latin American shares (8.9 per cent).
Note though that if your fund manager did have big weightings in esoteric areas like commodities and Brazilian equities, while performance has been great this time around, such a strategy is likely to be extremely volatile and medium-risk investors who discover they have half their portfolio in Brazilian smaller companies would be well advised to say "thanks very much but I'm outta here".
There is almost no place for heroics in long-term savings plans - the stakes are too high. Most people committing to long-term savings plans do so safe in the knowledge that when the world stockmarket does well so will their portfolios.
The last six months have seen markets fall rather than rise and fund managers with a broad mandate and index funds cannot realistically be expected to perform miracles in such circumstances. Indeed, even hedge funds whose main claim to fame is absolute returns are finding the going tough at present - in US dollar terms the CSFB Tremont hedge index is up by just 0.5 per cent in the first five months of 2008 with seven out of 13 strategies recording losses.
What is realistic, however, is to expect that when things do go well, the bulk of the benefits will accrue to your account rather than your fund manager. KiwiSavers are particularly well placed here because a number of KiwiSaver funds are available with sensible levels of annual fees - as low as 0.3 per cent a year and about one-fifth of that typically charged by the same fund managers in their retail unit trusts.
Much of the blame for the poor performance of balanced funds so far in 2008 can be traced to the poor showing of sharemarkets, which typically constitute about 60 per cent of a balanced portfolio and as much as 75 per cent for those with a growth bias. In the first six months of this year, global shares measured in New Zealand dollar terms are down by 6.9 per cent with New Zealand shares performing particularly badly - down 19.2 per cent.
Much of this damage was due to former market darlings Fletcher Building (41.9 per cent), Fisher & Paykel Appliances (43.1 per cent), Fisher & Paykel Healthcare (36.2 per cent) and Sky Network TV (26 per cent).
Telecom, the biggest stock in the index, outperformed for a change with just a 9.6 per cent decline. Among the best performers were PGG Wrightson (22.8 per cent) and NZ Farming Systems Uruguay (16.7 per cent).
The one bright spot for most portfolios was the fixed interest sector - government bonds and cash - which returned 4.3 per cent and 4.5 per cent respectively. The half year was a notable one in the credit markets and it underlined the wisdom of limiting one's fixed-interest portfolio to low-risk bonds if one is to realise the benefits of bonds as a stabilising force in volatile markets.
In bad times like this interest rates bifurcate - low-risk bonds go up in price while risky credits fall in price. In the half year, low-risk 2017 New Zealand government bonds returned 2.5 per cent whereas higher risk BBI networks 2012 bonds fell in value 32 per cent as the market worried about the company's prospects and demanded a higher return to compensate.
It's also worth noting that while the half year recorded falls in share prices, things could have been worse still had the kiwi not started to fall in the period - particularly against the Australian dollar and the euro, where the New Zealand dollar was off by 9.2 per cent and 6.7 per cent respectively versus just 0.6 per cent against the greenback.
So the numbers as at June 30 are not good, but small losses in a six-month timeframe are quite normal and nothing for a long-term investor to get worried about.
Measured in terms of multiples of earnings, international shares look reasonable value at present - unlike residential property, which looks expensive on just about every measure. International shares are much better value today than they were 10 years ago when price-earnings multiples were high and the technology bull market was in full swing.
Consequently, the 10-year period ended June 30, 2008, shows international shares to have managed a return of just 0.7 per cent a year in New Zealand dollar terms and that is before management fees.
This column has previously quoted Clifford Asness of AQR Capital Management, who has consistently argued that you cannot blindly buy shares without having regard to valuation and hope for the best. Timing can be important. If you buy high, you can get stuck with poor returns, even with the benefit of a 10-year horizon.
Very long-term data is more encouraging - US shares have averaged 12.8 per cent a year in New Zealand dollar terms since 1925, but share valuations were a lot more attractive then than they were in 1998, performance is further flattered by measurement in a gently depreciating kiwi and much of the increase is due to shares becoming more expensive rather than genuine earnings growth.
The good news is that today share valuations look reasonable and, with low fees and the government subsidy, KiwiSaver remains far and away the best option for most people saving for their retirement. Sooner or later, markets will recover, interest rates will fall, savers will be rewarded and fund managers and stockbrokers will breathe a sigh of relief.
Now some good news. Professor Mike Staunton, of the London Business School and co-author of the Global Investment Returns Yearbook, was in New Zealand briefly this month. Staunton was able to research enough historical data that he now has records on New Zealand shares, bonds, cash and exchange rates back to 1900. Next year's yearbook will see New Zealand data's debut in this important publication.
* Brent Sheather is an Auckland stockbroker/financial adviser and his adviser/disclosure statement is available on request and free of charge.
